Start by having her contact a legal professional in her area who is familiar with libel (defamation by written or printed words, pictures, or in any form other than by spoken words or gestures). Show this person all emails, all domain registration records, and anything else necessary. Advise your client to work with said legal professional to clear her name - this may include phoning all of her clients and explaining what happened. (Don't do that until you've received advice from the libel lawyer, though. This might weaken or undermine the legal strategy against the aggressor. The lawyer will have a better idea of how to proceed.)

If your client meets any questions about this incident calmly, openly, and clearly, without slamming or denigrating the aggressor...she'll come off looking much, much better and will stand a better chance of maintaining the respect, and continued business, of her clients.

Depending on what the agressor has said, your client may meet some fairly direct questions about her business methods. Personally, I would advise answering these questions openly and without becoming defensive. That will make her look more mature, more professional - especially in contrast to what the agressor appears to have done, which is definitely not professional or ethical.

You may want to advise your client to speak to someone who knows cyberlaw, to get the subdomains freed up. (...don't know how the aggressor is able to hold onto subdomains if the primary domain is on a different set of nameservers...that's an interesting trick.)